France defies critics with foreign investment paradox

PARIS (Reuters) - While its rich decamp to lower tax neighbors and a government minister pulls the welcome mat from under the world’s top steel tycoon, France is nevertheless taking a growing share of investment from undeterred foreigners.

That includes firms such as Chicago-based biotech Novian Health, lured to a technology park outside Paris by generous tax credits for research and development.

According to auditors Deloitte, France offers the most generous such incentives among OECD countries, with a tax credit worth 30 percent of companies’ research and development spending below 100 million euros ($130 million) and 5 percent above that limit.

The rates are even higher for companies in the first two years they use the credits, and there are further advantages when research is carried out in partnership with public bodies.

That goes part way to explaining why $18.6 billion of foreign direct investment flowed into France in the second quarter, ranking it third among the 41 developed and emerging market countries tracked by the OECD, with only China and the United States attracting more.

FDI inflows so far this year stand at 42.5 billion euros as of October, better than the 29.5 billion euros seen in the whole of 2011. That puts France on course for the best year since a peak of 70 billion in 2007 just before the financial crisis broke, despite a reputation for high and rising taxes and over-protective labor laws.

Such advantages have helped attract big groups such as Google (GOOG.O), which has its headquarters for southern Europe in Paris, and Amazon (AMZN.O), which opened a new logistics center in June and has plans for another site.

According to Ernst and Young, France is also the favorite choice for companies setting up industrial plants in Europe, despite the long-term decline in France’s manufacturing base.

Ernst and Young counted 171 new manufacturing plants set up by foreign firms in France last year, well ahead of Germany, with 121, and Britain, with 92.

LONG-TERM UNATTRACTIVENESS

But the figures are still “paradoxical”, says Ernst and Young partner Marc Lhermitte.

“Many foreign investors, and even French firms, are asking themselves what role France is going to play in this phase of globalization,” he said.

“France’s attractiveness as a site for some industrial jobs and plants does not make up for its long-term unattractiveness due to price competitiveness,” he added.

Labor costs have been rising more quickly than in Germany over the last decade, gradually making it more expensive to produce in France, helping push it from second to third place behind Britain and Germany in Ernst and Young’s survey of attractiveness for foreign firms to do business.

And 9.9 billion of the 29.5 billion euros invested in France last year went into real estate and mergers and acquisitions, while investment in greenfield projects, at 2.2 billion euros, was the lowest since 2003, according to Bank of France figures.

“There’s not a lot of the inflow that creates new production capacity,” said economist Denis Ferrand at think-tank COE-Rexecode.

Moreover, French firms invest more than double abroad what foreign companies invest in France. While that might reflect a healthy push for foreign market share, it could also be driven by a desire to avoid high labor costs at home.

“The question is whether the foreign investments reflect a decision not to invest in France,” Ferrand said.

President Francois Hollande has pledged to reverse France’s long-term decline in international competitiveness with a package that aims to cut companies’ labor costs and an overhaul of labor market restrictions next year.

But his efforts to revive competitiveness are being drowned out by a stand-off with global steel giant ArcelorMittal ISPA.AS over its idled Florange steelworks, which the government threatened to nationalize. That threat followed minister for industrial recovery Arnaud Montebourg’s blunt assertion that CEO Lakshmi Mittal was “no longer welcome” in the country.

All of which compounds some business leaders’ concerns about the government’s attitude to business after it earlier announced plans to hike taxes on big firms and levy a temporary tax of 75 percent on personal incomes upwards of 1 million euros a year.

Economists said it could take several months or years to see what impact such concerns might have on foreign investment.

“If you’re thinking of investing in Europe or in France and then this new government comes along, you might put plans on hold and see how things go,” said senior OECD economist for France Peter Jarrett.